"If you converted your IRA into a Roth and you found that your adjusted gross income was in excess of $100,000 and you couldn't do it, the IRS allows you to reverse the mistake," says Jim Wagner, president of Trust Administration Services, a San Diego-based retirement services firm. "That lets you avoid penalties and all sorts of things. This is a nice availability that the IRS has afforded us."
2. Talk to your Roth IRA custodian and fill out redo forms. Once you've decided to undo the conversion, your first step should be to pick up the phone and talk to your Roth IRA custodian, which is usually a bank, brokerage, mutual fund or some other type of financial services firm. Customer service representatives or retirement planning specialists can walk you through the specifics of how to undo the conversion and recontribute the money to a traditional IRA.
"Typically, brokerage firms or mutual fund companies have premade forms, so all you have to do is ask them for the form and fill it out and send it in, and they will recharacterize it for you," says D'Italia.
Your financial services company will generally ask you for the account numbers for the Roth IRA and traditional IRA account that the funds need to be moved to and from, the date on which the initial conversion was made and the amount of any Roth investment gains. If you don't want to redo your entire conversion, you can choose to recharacterize part of it. In that situation, you need to specify which assets from which accounts you want to redo, should you have more than one Roth IRA account.
"Do your homework and work with a custodian that knows what they're doing so that all the i's are dotted and the t's are crossed," says Wagner. "If you do that, I think you're in good shape."
3. File an amended tax return. When you redo a conversion, you must file Form 8606 along with your amended tax return, the 1040X, says McCabe. The financial services institution that serves as custodian of your account will send you two Form 5498s that will show the amount of the conversion and the amount of the recharacterization, which you or your tax adviser will use to prepare your amended return.
The amended return must be filed by Oct. 15 for the tax year in which you converted, says Wagner. If you wait until after Oct. 15, IRS rules don't allow you to undo your conversion, so you will just have to live with it.
Your original 1040 form shows the amount of tax you paid on the conversion. When you file the 1040X, you'll figure out how much interest the IRS owes you on your refund for the tax that you already paid, Wagner says.
4. Consider when to reconvert to a Roth. Odds are, if you converted to a Roth IRA in the first place, it's a retirement investment you want. So once you get past the IRS imposed waiting period -- 30 days after recharacterization or one year after conversion, whichever is later -- you are free to convert again. If you convert in 2010, the IRS gives you a two-year window to pay your taxes.
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